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Safety first – Update on supply chain management in Bangladesh

We have been engaging with garment retailers for stronger labour standards and supply chain management in Bangladesh and beyond.

Setting the scene

It has been over three years since the eight-storey Rana Plaza building in Bangladesh’s capital Dhaka collapsed, taking with it the lives of over 1,100 garment workers that were on its premises producing clothes for global retailers. In its wake, two initiatives were set up, the Alliance for Bangladesh Worker Safety (Alliance), which was founded by North American retailers and brands, and the Bangladesh Accord on Fire and Building Safety (Accord), which has mainly Asian, Australian and European company signatories. Both initiatives set out binding, five-year undertakings that aim to improve safety in ready-made garment factories in the country through inspections and audits.

On the third anniversary of the collapse of the Rana Plaza building, we signed a joint investor statement addressed to companies that are members of the Alliance and Accord. While acknowledging the positive steps taken towards improving the safety of workers, the statement highlighted remaining concerns about the pace of progress in addressing systemic issues and called for further action from international brands. This includes the provision of financial support to suppliers where appropriate, the establishment of independent safety committees in factories to sustain improvements that have been made and the public disclosure of factories in their supply chains.

We visited a number of international brands, their suppliers and other stakeholders in Bangladesh in late 2014 to understand the issues on the ground. Three years on from the accident, we reflect on what has been happening in the sector and how the focus of our engagement with companies has shifted.

Progress

After the 2013 Rana Plaza disaster in Bangladesh, the primary aim of retail companies and their stakeholders was to improve health and safety standards in the garment manufacturing sector.

Immediate structural safety issues, such as the provision of escape routes and exit doors in factories, negligence of which has led to companies being fined in the past, have now been addressed by the companies we have been engaging with. However, the rate of progress when looking at all outstanding remediation required ahead of the expiry of the Alliance for Bangladesh Worker Safety (Alliance) and the Bangladesh Accord on Fire and Building Safety (Accord) in 2018 has been slower than expected.

Commonly cited obstacles include the limited availability of certified specialists, such as engineers, and delays in obtaining materials and equipment such as fire doors, although we understand from the Accord that these are being overcome.

Oversight

In our engagement, we have pushed for oversight of sustainability risks in supply chains by retail companies and their boards through ambitious targets and tracking of progress at the group level.

We are therefore pleased that advances have been made in the transparency of supply chains. Several companies in our engagement programme have completed the mapping of their supply chains through to tier 2 and 3 suppliers, covering ancillary processes such as washing and dyeing, as well as fabric mills.

Encouragingly, some retailers have gone beyond the requirements of the Accord and Alliance and undertaken their own auditing and structural surveys of all their suppliers, including those for which they are not the lead buyer.

Positive steps have also been taken by some retailers in response to the refugee crisis in Europe and the Middle East. Refugees entering the supply chain illegally are vulnerable to exploitation, which is why some retail companies have been working with local NGOs and auditors to identify and redress instances and provide disclosure on this matter.

Workers’ rights

In view of the improvements in structural safety and oversight, our engagement focus has shifted to the rights of workers in supply chains and how the dynamics between suppliers and brands can be improved to sustain and encourage best practices.

As unions have traditionally been largely absent from Bangladesh, we have pushed for the rights of workers to organise and represent themselves collectively. Our 2014 visit to the country had given us concern about how effectively worker participation committees were functioning in factories, which we fed back to the retail companies we spent time with and called for further action on.

A couple of companies have since signed agreements with global unions to provide more effective support to workers and their representatives, such as negotiation training. However, we also want to see improvements in factory human resource processes, including the training of supervisors and the introduction of meaningful metrics which provide insights into the management of workers.

Productivity

Another significant issue in the supply chain has been the poor productivity of workers, in other words the output per employee. During our 2014 visit, two of the retail brands we met told us that productivity is lower in Bangladesh than in their other sourcing markets, in part due to faults in the production of garments.

Efforts by some retailers to increase wages indicate that this can enhance productivity, with trials finding that output and efficiency increase, while costs associated with employee turnover decrease due to investment in the training of workers, as well as supervisors, on management practices.

Order volatility also remains one of the biggest pressures on suppliers and in our engagements, we urge brands to address volatile buying practices and insecure short-term relationships.

Longer-term planning can provide suppliers with the certainty to invest in employee and processes, driving standards, while also offering more competitive pricing to buyers. Recognising this Swedish, multi-national retailer H&M is committing to five-year agreements with suppliers that perform highly on sustainability and to three-year plans for the next tier. We will continue to monitor H&M’s progress in this area and encourage other brands to improve their buying practices.

Trying to address labour standards in its Bangladesh supply chain may have also led US retailer Wal-Mart to improve human capital management across its business, increasing the pay of many of its store staff and investing substantially in staff training and career development.

Reporting

In our engagements, we encourage companies to adopt the UN Guiding Principles on Business and Human Rights Reporting Framework in order to effectively communicate how they manage human rights impacts, ranging from child labour to women’s rights and workplace harassment. We supported the development of the principles through our participation in the Shift Project. Speaking on a panel with several companies we engage with at an EU conference on human rights, we were pleased to hear about the benefits of the framework as an internal management tool, which supports their engagement with investors and other stakeholders. We called for consistency in the implementation and guidance of non-financial reporting across different markets, including on human rights, while cautioning against a too prescriptive focus on common metrics or data points. In our experience human rights impacts vary greatly between companies, sectors and geographies and so we suggested that companies should have the flexibility to report meaningfully and qualitatively on the risks and impacts most salient to their operations.

We have also supported the development of the Corporate Human Rights Benchmark which ranks the top 500 companies globally on the basis of their human rights risk management and disclosure. This complements a number of other initiatives seeking to drive transparency and better performance on social issues, such as the Modern Slavery Act in the UK, the above-mentioned UN Guiding Principles reporting framework, the EU directive on non-financial reporting and the US Business Supply Chain Transparency on Trafficking and Slavery Act. We believe that the benchmark can encourage the provision of better quality and comparable information from companies to inform our engagement with and assessment of them, as well as incentivising businesses to adopt best practices from peers.

New market challenge

A key test of companies’ progress is the extent to which they embed best practices in new sourcing markets and apply the lessons learned from their experience in Bangladesh and elsewhere. In Myanmar, for example, several companies entering the country have petitioned the government to introduce a living wage for the textile industry, in a demonstration of their commitment to staying there.

We will explore this issue with companies considering or already sourcing from this market and seek to visit factories on the ground at some point in the future.

We will also focus our engagement increasingly on the environmental challenges facing factories in the supply chain, such as water and waste management, as well as parts of the supply chain previously not scrutinised, such as tanneries.

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Dominic BurkeSector lead: Consumer Goods and RetailDominic Burke is sector lead for consumer goods and retail. He also focuses on engagements in the financial services and utilities sectors. Previously, he was part of the Business and Client Development team. Before joining Hermes EOS, Dominic worked at a non-executive search firm for FTSE 100 clients and for Tata Chemicals. He is a graduate of Cambridge University and holds the CFA Institute’s Investment Management Certificate. Read all articles
by Dominic Burke